By Catherine Park, Esq.
Condominium developers must file a warranty bond or letter of credit or cash with the D.C. Government to cover potential structural defects in newly-constructed condominium units for a period of two years from the date of first sale. This warranty, required by D.C. Code § 42-1903.16, cannot be disclaimed by “sold as is” language for any residential condominium unit. For new conversion condominiums purportedly “sold as is,” the warranty cannot be disclaimed for any components installed by the conversion condominium developer if the units are sold for residential purposes.
The law requiring warranty security was enacted in substantially its current form in 1991. Enforcement has frequently been difficult, however, because developers in many instances abused the privilege of doing business in and profiting from the ever-increasing demand for housing in the District by building shoddy units plagued by, for example, gas leaks, faulty plumbing, flooding, mold, exterior cracks, infestation, etc.—even in brand-new construction.
Because the required warranty bond is only 10 percent of the developer’s estimated costs of construction/conversion, many condominium purchasers suffering from the most extensive damage found the amount of the security to be inadequate or, sometimes, non-existent. That is to say, developers have even posted falsified letters of credit in response to the warranty security requirement. When the victimized purchasers filed lawsuits, the developers would file for bankruptcy, leaving the homeowners without recourse.
DC Bill 23-601 (“Condominium Warranty Amendment Act of 2020”), currently under review at the D.C. Council, seeks to remedy some of the enforcement issues by imposing stringent requirements on developers. At the Council hearing on September 17, 2020, the testimony consisted largely of outcries from the developer community against DC Bill 601, which, among other things, imposes criminal liability for misrepresentations by developers in connection with the registration and offering of condominiums, including the warranty security requirement. The developers testified that their profit margins were already thin and predicted that the bill, if enacted without revisions, would be the death knell for condominium construction in the District.
DC Bill 601 transfers administrative powers over the warranty security to the Department of Consumer and Regulatory Affairs (DCRA), which is also given the authority to retain a licensed, independent engineer to make a determination whether a “structural defect” exists such that warranty security funds must be released.
DC Bill 601 provides condominium associations with reimbursement of their legal fees and costs if they succeed in their claims for drawing upon the warranty security, whether the claims are brought in the administrative forum or in a court of competent jurisdiction. Reimbursement of legal fees and costs is unavailable to individual claimants in the current draft of DC Bill 601. While individual condominium owners are frequently overlooked in contrast to condominium associations, DC Bill 601 is still beneficial to individual condominium owners, as well. Without DCRA’s retention of an independent engineer, individual claimants would be forced to pay out of pocket to hire an engineer to inspect, document, and attest to the existence of structural defects. Any party may appeal DCRA’s determination to the D.C. Office of Administrative Hearings.
The statute of limitations for filing a claim to draw upon the warranty security is five years, under D.C. Code § 42-1903.17, although the developer’s warranty covers only structural defects occurring during the first two years after purchase of a newly-constructed or newly-converted condominium unit (resale units are not covered by the warranty).
Nor are maintenance items covered by the warranty. Currently the term “structural defect” covers a “defect in a component that constitutes any unit or portion of the common elements that reduces the stability or safety of the structure below standards commonly accepted in the real estate market, or restricts the normally intended use of all or part of the structure and which requires repair, renovation, restoration, or replacement.” D.C. Code § 42-1903.16. However, DC Bill 601 would expand the definition of “structural defect” to include building code violations, which the developer community vehemently opposed at the Council hearing.
DISCLAIMER: The opinions expressed herein are general and might not be applicable to your case or circumstances. If you need legal advice about a specific matter, consult an attorney in your jurisdiction.